What is a Living Trust?
A living trust is a written declaration and contract in which you state that you (as “grantor”) are transferring your property into living trust for the benefit of yourself during your lifetime (lifetime “beneficiary”) and then for the benefit of your heirs (remainder “beneficiaries”). You will be the “trustee” of your living trust which means that during your lifetime, you will have complete control over the living trust’s assets. The “successor trustee” you name will take control over your living trust in case of your death or incapacity. In addition, you will have the power to change, amend or revoke your living trust at any time during your lifetime.
Avoidance of Probate
The main advantage for a living trust is the avoidance of probate. Probate is a state court proceeding in which your property is transferred to your heirs. All Wills must be probated. Since probate only affects assets which you own at the time of your death, assets placed in a living trust are not owned by you, therefore, there is no probate on those assets. Probate will generally cost about 3-4% of the value of the probate assets and will take between 9 months to 2 years (absent litigation or contested claims) to complete.
Confidentiality and Continuity of Ownership
Since probate is a court proceeding, your Will and the valuation of your assets are open to public inspection. A living trust, however, is confidential and the transfer of assets from the living trust is kept from public view. When the grantor of a living trust dies or becomes incapacitated, the successor trustee continues the administration of the living trust. There is absent the “gap” period between the time of death and the appointment of the executor which occurs under a Will. Also, the continuity of the living trust is preserved if the grantor becomes incapacitated through illness or accident through the successor trustee. In this case, the living trust would be administered for the benefit of the grantor.
Advantages to a Will
A Will only takes effect upon the death of the person, therefore, nothing has to be transferred or administered currently. Also, the probate estate is a separate taxpayer which can select a fiscal year end — an advantage over a living trust. The decedent’s creditors have a very short statute of limitations period to bring any claims in a probate and once that period has passed, those creditors are barred from asserting claims against the heirs. The probate is an orderly and well established process; creditors and debtors familiar with dealing with an executor of a Will. Dealing with the probate court system and bureaucracy, however, can be a lengthy and frustrating experience. In conclusion, the Will presents none of the administration difficulties associated with a living trust during the life of the grantor.
Disadvantages of a Living Trust
All assets which are to be owned by the living trust must be transferred currently into the living trust. Real property deeds must be transferred into the name of the living trust and if the transfer involves real estate, other than a personal residence, then generally all lien holders (mortgagees) must consent to the transfer. Likewise, all bank accounts must be reopened in the name of the living trust, all partnership and stock interests must be transferred, and each of these transfers typically requires special documentation by the transfer agent.
In addition, the trustee must title and sign all documents relating to the living trust as “John Doe, Trustee, John Doe Revocable Trust dated January 1, 1989”, instead of merely signing his or her name. All purchases and sales must be conducted in the name of the living trust.
Third parties who are used to dealing with an individual often have a difficult time dealing with the trustee of a living trust. Often they will insist that the living trust agreement be provided or that their attorneys review the living trust, at the living trust’s expense, before they will transact business with the trustee. Inevitably, the trustee must educate those with whom he or she does business as to the legal validity of the living trust and the legal right of the trustee to transact business on behalf of the trust.
To summarize, the transfer of assets to the living trust must be carefully and properly documented, and dealing with third parties tends to be difficult. The living trust, because of the transfer of documents and its operation as a viable entity during the grantor’s lifetime, make it more expensive to draft and implement than a Will.
Conclusion
Initially a living trust has greater costs with respect to its formation and implementation than a Will, but those costs are usually a small percentage of the amount saved through the avoidance of probate costs at the time the grantor dies. Additionally, if confidentiality and continuity of ownership are important objectives, then the living trust is the document of choice. Conversely, if confidentiality and continuity are not important objectives, and if the initial cost and constant administration of a living trust outweigh the potential savings through the avoidance of probate, then a Will should be used.
Irrevocable Life Insurance Trust
An irrevocable life insurance trust is an ideal vehicle in which to place a life insurance policy. The goal is to have the trustee of the trust the owner of the policy; the grantor exercises no control over trust. In this manner, the life insurance proceeds do not become part of the decedent’s estate for estate tax purposes. The beneficiaries of the life insurance trust are typically the same beneficiaries of a funded revocable trust (usually the surviving spouse for the rest of his or her life and then the children).
The annual life insurance premiums are paid by the grantor contributing the necessary funds to the trust and the trustee then pays the premiums. These contributions are treated as gifts and in order to qualify for the annual gift tax exclusion, these gifts must be subject to current withdrawal by the beneficiaries of the trusts (although in reality the beneficiaries are expected not exercise their right of withdrawal).
The benefit of an irrevocable life insurance trust can be illustrated as follows: The trust purchases a $1,000,000 life insurance policy on the life of the grantor. The grantor then makes annual contributions of $5,000 (assume this is the premium amount) which are considered a gift eligible for the annual gift tax exclusion. Upon the grantor’s death, the entire $1,000,000 is excluded from the grantor’s estate for estate tax purposes and the trustee distributes the proceeds according to the terms of the trust.
Durable Power of Attorney
A durable power of attorney takes affect upon the incapacity of the person signing it (the “principal”). The principal appoints an agent to make decisions regarding the property of the principal during the time of incapacity. The durable power of attorney is similar to the general power of attorney except that it only takes effect upon the incapacity of the principal. It is extremely useful in case of an accident or a long, debilitating illness, since absent a durable power of attorney, an application to the probate court for appointment of a guardian must be made.
Power of Attorney for Medical Care
California recently enacted legislation which permits a person (the “principal”) to designate an agent to make health care decisions for the principal. This power of attorney involves only health care decisions and does not affect the principal’s property and assets. Without a power of attorney for health care, doctors and hospitals may be reluctant to terminate life-supporting treatment for the principal, absent a court order.
Pour-Over Will
This Will is necessary when a living trust is used and is used as a safety net for those assets which have not been titled in the name of the living trust. It provides that any assets not held in living trust — and, therefore, subject to probate — will be placed (“poured-over”) into the living trust after the probate is completed. Generally, there are some assets which are not placed into living trust at the time of the grantor’s death and the Pour-Over Will makes sure that the living trust provisions will apply to those assets.
Transfer of Assets Into Living Trust
In order to transfer the grantor’s assets into living trust, the following information is needed:
- Deeds to all properties, and the names and addresses of all lien holders of record on the properties.
- Copies of all mortgages, trust deeds, and installment obligations held by the grantor under which payment is being made to the grantor.
- The real property tax bills.
- Account information (usually the first page of the most recent statement) for all bank accounts, brokerage accounts and mutual funds.
- The names and addresses of all general partners for any partnership interest held.
- The name and address of all transfer agents for all stock certificates held. A copy of any stock certificate held in a closely held corporation.
- Copies of all leases and promissory notes and the name and address of the parties to the leases and promissory notes.
- Title documents for cars, boats or other property which have title documents.
- Financing statements for all property for which a UCC-1 financing statement has been filed.
- Titles of any books, publications, musical scores or other original creations and any federal copyright registration numbers thereon.